Question

Asymmetric information and labor markets Arjun is the manager of a factory. Workers at the factory are assigned to one of two tasks, one of which requires skilled labor and one of which requires unskilled labor. Because skilled workers earn a higher wage than unskilled workers, everyone who applies for a job says they're skilled. Arjun's challenge is to figure out who is actually a skilled worker and who is an unskilled worker. Suppose that Arjun would like to use the economic concept of signaling to separate out worker types. Which of the following scenarios illustrates this concept? Skilled workers enroll in an online certification course to demonstrate their ability. Skilled workers pay to take a certification course to demonstrate their ability. Arjun voluntarily pays all workers a higher wage in hopes of attracting and retaining more productive workers. Arjun implements a test to determine whether applicants are skilled or not. Suppose, instead, Arjun considers paying efficiency wages to increase the factory's profitability. True or False: Efficiency wages are set below the average industry wage and are intended to give the firm implementing them a competitive advantage over rivals. True False

Answer 1

Skilled workers may use signaling through certifications to demonstrate their qualifications. The statement about efficiency wages being set below industry average is false; they are actually set above the average to incentivize and retain quality workers.

Step-by-step explanation:

In the context of asymmetric information within the labor market, signaling is a method skilled workers might use to demonstrate their qualifications to potential employers like Arjun, the factory manager. When skilled workers enroll or pay for a certification course, they are signaling their skill level and commitment, which helps employers like Arjun differentiate between skilled and unskilled candidates.

Regarding the true/false question, the statement is False. Efficiency wages are wages that are set above the industry average to increase productivity and reduce turnover by attracting higher quality workers and incentivizing them to work harder to keep their jobs.

Signaling, efficiency wages, and pre-screening candidates are key practices that can mitigate the issue of asymmetric information in the labor market by revealing true employee attributes.